Budgeting is a key activity for small businesses. The primary components of a budget are sales revenue, fixed costs, variable costs and profit. Estimating sales revenue allows you to see the level of costs that your business can support. It is then a matter of making the tough decisions about what costs you can forgo in order to generate a reasonable profit.

Why Budget?

Budgets help small businesses plan for the future. A budget serves both as a road map indicating where your business is going and a scorecard to assess results at the end of the year. Budgets are also key components in securing financing. A bank or investor will carefully examine your budget prior to lending money to your business. This does not mean that you need to make your budget look extremely profitable. Investors are well aware of the markets and typical profitability of small businesses. An accurate budget will create trust between your business and its creditors and investors.

Sales Revenue

According to the U.S. Small Business Administration, estimating sales revenue is the most crucial part of budgeting. Once you have an accurate sales estimate, you can figure out the right cost level to achieve a profit. The best basis for revenue is the historical performance of the business. Make adjustments to historical sales as necessary when creating the budget. Adjustments could include the impact of a new product, market or customer.

Fixed Costs

Costs that do not vary with sales level are known as fixed costs. Typical fixed costs include existing employee salaries and benefits, rent and information service fees. These costs remain relatively steady in any given year, no matter how much the sales volume varies.

Variable Costs

Variable costs change depending on the level of sales volume. Typical variable costs include material expenses such as inventory, supplies and packaging. The more revenue your business generates, the more materials you will need to meet demand, resulting in higher variable expense. If you run a service-based business, variable expenses could include travel costs or commissions.

Profit

Subtracting fixed and variable expenses from sales will give you a budgeted profit. Profits should be adequate to provide a return on the money and time that you have invested. For example, if you invested $100,000 into a small business and are targeting a 10 percent return on investment, you should budget a profit of no less than $10,000. You may also wish to reinvest some of your profits into growing the business.

Budgeting Tips

Keep it simple. Include major cost and revenue items, but don't go into unnecessary detail. For example, you can include just one line item for materials, rather than breaking it down by each material component. Review results at the end of each year or quarter. If certain expenses are well over budget, examine them in detail and assess whether your business needs to better manage the expense in the future. You may find yourself over budget due to uncontrollable cost increases or simply because your initial budget was a rough estimate. Use the budget results to fine-tune your next budget.

About the Author

Elizabeth Bell is a business professional who has been writing since 2009. Her work appears on websites including eHow and Answerbag. She specializes in content that is focused on business, finance, technology, health and travel. Bell holds a Bachelor of Science in commerce from the University of Virginia.